Tax Policy and Sole Proprietorships: A Closer Look

The 21 million sole proprietorship returns filed in 2005 represent a wide variety of economic activity. This paper examines three major tax policy issues related to sole proprietorships—taxpayer compliance, taxpayer burden, and incentives for growth. It uses tax return data to take a closer look at sole proprietorships. It proposes a new taxonomy for describing these returns in an economically meaningful way, based on the principal factors of production that they use: their own labor, hired labor, and capital. It uses the taxonomy to examine several aspects of sole proprietorships. The paper concludes with suggestions for further research.